Method and system for coverting an annuity fund to a life insurance policy

ABSTRACT

A method and system for converting an annuity fund to a life insurance policy at a predetermined conversion date comprising the following steps: establishing an annuity fund including selecting an initial predetermined value and purchasing an annuity for the initial predetermined value, establishing an irrevocable life insurance conversion plan including selecting the predetermined conversion date, selecting a predetermined mortality death benefit at the predetermined conversion date and purchasing a guaranteed insurability option to guarantee the availability of the predetermined mortality death benefit at the predetermined conversion date, accruing investment income within the annuity fund on a tax deferred basis until the predetermined conversion date, converting the annuity fund to the life insurance policy with the predetermined mortality death benefit at the predetermined conversion date, accruing income within the life insurance policy until the death of the owner of the life insurance policy and disbursing the death benefit to the beneficiary at the death of the owner of the life insurance policy.

BACKGROUND OF THE INVENTION

[0001] 1. Field of the Invention

[0002] A method and system for converting an annuity fund to a lifeinsurance policy at a predetermined conversion date.

[0003] 2. Description of the Prior Art

[0004] Annuities and life insurance are designed to meet differentspecific financial planning objectives. Since the Internal Revenue Codecan have a significant impact on the realization of a person'sparticular goals, tax consideration of the tax consequences in theselection and purchase of annuities and/or life insurance is often acompromise.

[0005] Investment income from the cash values inside the annuityappreciates on a tax deferred basis. Such annuities have no deathbenefit other than the return of the current account value. Thus, noneof the premium for the annuity is invested in current mortality costs.Except for any costs and fees, the entire annuity deposit is availableto earn investment income.

[0006] Distributions of the investment income to the annuitant are taxedas ordinary income. Upon death, the proceeds of the annuity are incomein respect of a decedent and taxed as ordinary income to the estate.

[0007] On the other hand, variable universal life insurance policiesthat qualify under Section 7702 of the U.S. Internal Revenue code havesignificant tax benefits. In order to qualify within the IRC, not onlymust the investment meet the diversification requirements identical tothe diversification requirements for annuities, but the death benefit inrelationship to the premium deposit must first satisfy the GuidelineSingle Premium (GSP) requirement as statutorily mandated. Otherwise thepolicy will not qualify as a life insurance policy under Section 7702.The GSP defines maximum premium payable with respect to the initialdeath benefit. In addition, a cash value corridor that varies by age,between the face amount and the account value must be maintained at alltime.

[0008] The difference between the initial face amount, as determined bythe GSP, and the initial account value is the amount of the mortalityinsurance established at the time of automatic conversion to the lifeinsurance policy. Since the cash value corridor decreases by age, therequired Face Amount in relationship to the account value decreases.Therefore the mortality element as required by Section 7702 decreases asthe age of the applicant increases.

[0009] To the extent the assets of the life policy are used to purchasemortality insurance, such assets are not available for investmentpurposes. The younger the person is that is proposed to be the insuredlife, the greater impact this concern will have on the decision topurchase the life policy.

[0010] Significantly, an owner of a life insurance policy can exchangethat policy for another life policy or for an annuity without an eventof recognition under the U.S. tax laws as a Section 1035 exchange.Similarly, an owner of an annuity can exchange that annuity for anotherannuity without a tax consequence under Section 1035.

[0011] Unfortunately, the owner of an annuity cannot exchange for a lifeinsurance policy without an event of tax recognition under Section 1035.Instead, the annuity holder would be taxed at ordinary rates on thedifference between his tax basis in the annuity and the proceeds of theannuity.

[0012] Thus, there is need for a method or system that is an annuity atthe time of creation, but will convert automatically, and withoutfurther election on the part of the owner, into a variable universallife insurance policy at a specified date in the future.

[0013] At the time of the conversion from an annuity to a life policy,the amount of mortality insurance will be significantly less than if theproduct had been a life insurance policy from the outset. Further, thereis a build up of investment income with which to pay for the mortalitycharges.

[0014] The reason for the automatic conversion is to avoid theunfavorable tax treatment associated with an exchange of an annuity fora life policy.

[0015] Various examples of financial planning methods are found in theprior art as exemplified by the following patent.

[0016] U.S. Pat. No. 6,064,969 describes an investment system includinga computer implemented annuity system generating annuity proposals forcustomers comprising a memory storing customer information input from acustomer and annuity information and a processor to retrieve thecustomer and annuity information from the memory and generate an annuityproposal responsive to the customer and annuity information. Accordingto the annuity system, the annuity proposal includes one of the fixedperiod installments, life, joint and survivor, joint and contingent andproceeds at interest annuities. The proceeds at interest annuity mayalso be viewed as a flexible certificate of deposit investment proposalfor use by companies providing banking services.

[0017] U.S. Pat. No. 4,750,121 teaches a pension benefits system forenrolled employees comprising a trust institution and a life insurerinstitution where the trust institution receives periodic payments,purchases and retains a life insurance policy from the life insuranceinstitution covering each enrolled employee, invests in availablesecurities, provides specific accurate future projections of periodicbenefits, receives all life insurance policy proceeds upon the death ofeach enrolled employee and distributes all periodic payable benefits.

[0018] U.S. Pat. No. 4,969,094 relates to a self-implementing pensionbenefits system for subscriber employees including a life insurerinstitution and a lending institution. The life insurer trustinstitution computes and receives each subscriber employee's periodicpayment primarily upon each subscriber employee's age and desiredperiodic benefits and issues a life insurance policy covering eachsubscriber employee providing specific accurate future projections ofperiodic benefits for retirement, death or disability; and distributingall life insurance policy proceeds upon the death of each enrolledemployee to the lending institution.

[0019] U.S. Pat. No. 6,161,096 describes a method for a deferred awardinstrument plan by identifying at lease one participant in the deferredaward plan, retrieving financial data related to stock optionscorresponding to the identified participant, computing a spreadassociated with the retrieved stock options, establishing a trust withthe spread, determining whether a life insurance policy has beenpurchased by the participant, determining whether a split dollaragreement has been executed, monitoring and paying at least one premiumfor the life insurance policy and notifying the participant that apayment associated with the life insurance policy has been paid.

[0020] A study of the prior art illustrates the need for a flexiblefinancial estate program or plan capable of maximizing return on capitalthat minimizes the tax consequences and associated increased charges.

SUMMARY OF THE INVENTION

[0021] The present invention relates to a method and system to establishand administer a plan convertible from an annuity phase and a lifeinsurance phase. Specifically, the plan is designed to optimize thefinancial benefits of an annuity plan and a life insurance policy withthe least or reduced tax consequences to the plan owner andbeneficiaries.

[0022] The method and system provides a mechanism for managing the planin the annuity phase and the insurance phase and to automaticallyconvert the annuity plan to a life insurance policy qualified underSection 7702 of the U.S. Internal Revenue Code to satisfy the GuidelineSingle Premium requirement.

[0023] In particular, the method and system comprises establishing anannuity fund of a predetermined value, establishing an irrevocable lifeinsurance conversion plan, accruing investment income within the annuityfund on a tax deferred basis until the predetermined conversion date,converting the annuity fund to a qualified life insurance policy with apredetermined mortality death benefit at the predetermined conversiondate and finally disbursing the death benefit to beneficiary at thedeath of the owner of the qualified life insurance policy.

[0024] The irrevocable life insurance conversion plan includes selectingthe predetermined conversion date, selecting a predetermined initialmortality death benefit at the predetermined conversion date andpurchasing a guaranteed insurability option to guarantee theavailability of the predetermined mortality death benefit at thepredetermined conversion date.

[0025] Once the annuity fund is converted to the life insurance policywith the predetermined mortality death benefit, income is accrued withinthe life insurance policy until the death of the owner of the lifeinsurance policy at which time the death benefit is disbursed to thebeneficiary. The cost of insurance and guaranteed insurability isdetermined by the age, sex and health condition including smoking statusof the plan owner.

[0026] A processor comprising an input means, a storage means, a displaymeans and a processing means including a calculating means is employedto model or create and to administer the convertible plan.

[0027] To implement the method and system of the present invention, theowner of the plan selects a plurality of plan parameters including theinitial value or amount of the annuity fund, the value or amount of themortality death benefit and the date for converting from the annuityphase to the insurance phase. The cost of the guaranteed insurabilityoption is also ascertained.

[0028] The selectable plan parameters together with cost of theguaranteed insurability option and annual or periodic plan managementfee are entered into a data base within the storage means. Of course,the cost of the guaranteed insurability option and periodic planmanagement fee as well as a table for the corridor required to meet theGuideline Single Premium requirement may be entered and maintained instorage independent of entry and storage of the plurality of planparameters.

[0029] Once the data and values are stored in or entered into theprocessor, the various values and amounts for the plan during theannuity phase and the life insurance phase can be calculated anddisplayed either on a CRT or similar device or in printed form. Withplan parameters, incremental investment income, cost of the guaranteedinsurability option and periodic management fee, the calculating meansis capable of calculating or generating the beginning of year fundvalue, net amount at risk, cost of insurance, either the cost of theguaranteed insurability option during annuity phase or the mortalitydeath benefit cost during life insurance phase, investment income, endof year fund value, corridor data or percentage and total death benefit.Thus, actual value and forecast value of the plan in either phase can becalculated and displayed.

[0030] The invention accordingly comprises the features of construction,combination of elements, and arrangement of parts that will beexemplified in the construction hereinafter set forth, and the scope ofthe invention will be indicated in the claims.

BRIEF DESCRIPTION OF THE DRAWINGS

[0031] For a fuller understanding of the nature and object of theinvention, reference should be had to the following detailed descriptiontaken in connection with the accompanying drawings in which:

[0032]FIG. 1 is a flow chart depicting the method and system of theinstant invention.

[0033]FIG. 2 depicts a model or example of the method and system of theinstant invention.

[0034]FIG. 3 shows a processor to implement the method and system of theinstant invention.

[0035] Similar reference characters refer to similar parts throughoutthe several views of the drawings.

DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENT

[0036] The present invention relates to a method and system forconverting an annuity fund to a life insurance policy at a predeterminedconversion date. The method and system provides a means to establish andadminister a plan convertible from an annuity to a life insurance uponthe selection of a plurality of plan parameters by a prospective planowner. The plurality of plan parameters includes the initial annuityfund deposit, plan issue age or date, conversion age or predeterminedconversion date initial death benefit amount and periodic or annual planmanagement fee. With this data or information and a projected return orperiodic incremental investment income the convertible plan can bemodeled for the duration of the plan including the annual beginning ofyear fund value, annual beginning of year net at risk amount, cost ofinsurance with the cost of the guaranteed insurability option during theannuity phase or the mortality death benefit during the life insurancephase, annual end of year fund value and annual year end death benefit.

[0037] In particular, the method and system provides a mechanism formanaging the plan in the annuity phase and the insurance phase and toautomatically convert the annuity plan to a life insurance policyqualified under Section 7702 of the U.S. Internal Revenue Code tosatisfy the Guideline Single Premium requirement.

[0038] In particular, the method and system comprises establishing anannuity fund of a predetermined value, establishing an irrevocable lifeinsurance conversion plan, accruing investment income within the annuityfund on a tax deferred basis until the predetermined conversion date,converting the annuity fund to a qualified life insurance policy with apredetermined mortality death benefit at the predetermined conversiondate and finally disbursing the death benefit to beneficiary at thedeath of the owner of the qualified life insurance policy.

[0039] The irrevocable life insurance conversion plan includes selectingthe predetermined conversion date, selecting a predetermined initialmortality death benefit at the predetermined conversion date andpurchasing a guaranteed insurability option to guarantee theavailability of the predetermined mortality death benefit at thepredetermined conversion date.

[0040] Once the annuity fund is converted to the life insurance policywith the predetermined mortality death benefit, income is accrued withinthe life insurance policy until the death of the owner of the lifeinsurance policy at which time the death benefit is disbursed to thebeneficiary.

[0041] As shown in FIG. 3, a processor generally indicated as 110comprising an input means or keyboard 112, a hard drive storage means114, a display means 116 and a processing means 118 including acalculating means and storage is employed to model or create and toadminister the convertible plan. The processor 110 is coupled to aprinter 120 by a cable 122. Further, the processor 110 may also beoperably coupled to an external or remote terminal by communicationslink 124.

[0042] To implement the method and system of the present invention, theowner of the plan selects a plurality of plan parameters including theinitial value or amount of the annuity fund, the value or amount of theinitial mortality death benefit and the date for converting from theannuity phase to the insurance phase. The cost of the guaranteedinsurability option is also ascertained.

[0043] The selectable plan parameters together with cost of theguaranteed insurability option and annual or periodic plan managementfee are entered into a data base within the storage means. Of course,the cost of the guaranteed insurability option and periodic planmanagement fee as well as a table for the corridor required to meet theGuideline Single Premium requirement may be entered and maintained instore independent of entry and storage of the plurality of planparameters.

[0044] Once the data and values are stored in processor 110, the variousvalues and amounts for the plan during the annuity phase and the lifeinsurance phase can be calculated and displayed either on a CRT orsimilar device or in printed form, stored or transmitted. With planparameters, incremental investment income, cost of the guaranteedinsurability option and periodic management fee, the calculating meansis capable of calculating or generating the beginning of year fund value(BOYFV), net amount at risk (NAR), cost of insurance (COI), either thecost of the guaranteed insurability option during annuity phase or themortality death benefit cost during life insurance phase, investmentincome (II), end of year fund value (EOYFV), corridor data or percentage(CP) and total death benefit (TDB). Thus, actual value and forecastvalue of the plan in either phase can be calculated, stored anddisplayed.

[0045] The convertible plan model is best understood with reference toFIGS. 1 and 2. Specifically, the prospective convertible plan ownerselects or chooses the initial fund deposit or amount such as$1,000,000; issue age such as 60, conversion age such as 75 or date ofconversion such as 15 years from establishing the fund and the initialmortality death benefit at date of conversion from the annuity phase tothe insurance phase such as $3,500,018. This data is entered into theprocessing means 118 through the keyboard 112 as shown in FIG. 3. Onceentered, the computer system generates the various periodic or annualvariables of BOYFV, NAR, EOYFV and TDB by applying constants of theagreed upon annual management fee (AMF) as a percentage of the annualbeginning fund amount, the COI as determined by the issue age,conversion age and initial mortality death benefit and corridorpercentage or required by Section 7702 along with the projectedinvestment income (PII) or actual investment income (AII). The actualinvestment income will be entered through the keyboard 112. Except forthe actual investment income, those values may reside in memory forlook-up once the variables are selected.

[0046] As shown, the initial beginning of year fund value (BOYFV) of$987,500 is the initial deposit $1,000,000 less the annual managementfee (AMF) which is for example of $12,500 or 1.25 percent of the initialdeposit. Thereafter, the annual beginning of year fund value is theprevious annual end of year fund value less the annual management fee.For example, at the beginning of the tenth year, the BOYFV for year 10is $1,774,570. That is, the EOYFV for year 9 of $1,797,033 less $22,463or 1.25 percent (AMF) of the EOYFV for year 9.

[0047] The net amount at risk (NAR) during the annuity phase iscalculated as the difference between the total death benefit (TDB) atthe date of conversion or $3,500,018 and the end of year fund value(EOYFV) of $2,434,637 at date of conversion (year 14) or $1,065,381. Thenet amount at risk (NAR) during the insurance phase is calculated as thedifference between the year end total death benefit (TDB) and theprevious year end fund value (EOYFV). For example, the net amount atrisk (NAR) for policy year 20 is $356,393 or $3,500,018 total deathbenefit (TDB for policy year 20) less $3,143,079 (EOYFV for year 19).

[0048] During the annuity phase, the cost of insurance is determined bythe amount of selected initial death benefit, issue age of person andconversion age of person. For the example or model shown in FIG. 2, theCOI is $7,270 annually, which is deducted from the fund. The COI duringthe insurance phase which varies annually is determined by there-insurer's or insurer's rate maintained in look-up tables or databasein the processor 110 derived from predetermined actuarial statistics.

[0049] Projected investment income (PII) is calculated as an expectedrate of return (ROT) that may be a constant or a variable by changingthe ROT through the keyboard 112. The actual investment income (AII) isinput into the processor 110 as actual and historical data is available.In either the annuity phase or insurance phase, the EOYFV is calculatedas the BOYFV less the COI increased by PII or AII. For example, inpolicy year 10, the BOYFV of $1,774,470 is reduced by the COI of $7,270and increased by the PII or AII of $141,384 for an EOYFV of $1,908,683.As previously described, the EOYFV is used to calculate the nextsucceeding BOYFV.

[0050] The TDB during the annuity phase is equal to the actual value ofthe fund at the time of death. For example, in policy year 10, the TDBwould be between $1,774,570 (BOYFV) and $1,908,683 (EOYFV).

[0051] During the insurance phase, the TDB is equal to the CP of theBOYFV or the selected initial death benefit which ever is greater. Forexample, in policy year 20, the product of the 105 percent (CP) and theBOYFV of $3,103,791 is $3,258,980 or less than the selected initialmortality death benefit of $3,500,018. Therefore, the TDB is $3,500,018for policy year 20. On the other hand, in policy year 22, 105 percent(CP) of the BOYFV of $3,495,352 is $3,670,120 or greater than theselected initial mortality death benefit of $3,500,018. Therefore, theTDB is $3,670,120 for policy year 22.

[0052] As described and illustrated, the values or amounts of thevarious parameters can be calculated for any particular period and overthe span of the fund plan by the processor 110. So calculated, thevalues can be displayed on the display means 116, printed on the printer120 and/or transmitted over a communications link 124 to an external orremote terminal.

[0053] It will thus be seen that the objects set forth above, amongthose made apparent from the preceding description are efficientlyattained and since certain changes may be made in the above constructionwithout departing from the scope of the invention, it is intended thatall matter contained in the above description or shown in theaccompanying drawing shall be interpreted as illustrative and not in alimiting sense.

[0054] It is also to be understood that the following claims areintended to cover all of the generic and specific features of theinvention herein described, and all statements of the scope of theinvention which, as a matter of language, might be said to falltherebetween.

[0055] Now that the invention has been described,

What is claimed is:
 1. A method for converting an annuity fund to a lifeinsurance policy at a predetermined conversion date comprising thefollowing steps: establishing an annuity fund including selecting aninitial predetermined value and purchasing an annuity for the initialpredetermined value, establishing an irrevocable life insuranceconversion plan including selecting the predetermined conversion date,selecting a predetermined mortality death benefit at the predeterminedconversion date, converting the annuity fund to the life insurancepolicy with the predetermined mortality death benefit at thepredetermined conversion date, disbursing the death benefit to thebeneficiary at the death of the owner of the life insurance policy. 2.The method for converting an annuity fund to a life insurance policy ofclaim 1 further including purchasing a guaranteed insurability option toguarantee the availability of the predetermined mortality death benefitat the predetermined conversion date.
 3. The method for converting anannuity fund to a life insurance policy of claim 2 further includingaccruing investment income within the annuity fund until thepredetermined conversion date.
 4. The method for converting an annuityfund to a life insurance policy of claim 3 further including accruingincome within the life insurance policy until the death of the owner ofthe life insurance policy.
 5. The method for converting an annuity fundto a life insurance policy of claim 1 further including accruinginvestment income within the annuity fund until the predeterminedconversion date.
 6. The method for converting an annuity fund to a lifeinsurance policy of claim 5 further including accruing income within thelife insurance policy until the death of the owner of the life insurancepolicy.
 7. The method for converting an annuity fund to a life insurancepolicy of claim 6 further including purchasing a guaranteed insurabilityoption to guarantee the availability of the predetermined mortalitydeath benefit at the predetermined conversion date.
 8. The method forconverting an annuity fund to a life insurance policy of claim 1 furtherincluding accruing income within the life insurance policy until thedeath of the owner of the life insurance policy.
 9. The method forconverting an annuity fund to a life insurance policy of claim 8 furtherincluding purchasing a guaranteed insurability option to guarantee theavailability of the predetermined mortality death benefit at thepredetermined conversion date.
 10. A system for converting an annuityfund to a life insurance policy at a predetermined conversion datecomprising the following steps of selecting a plurality of planparameters including an initial value of the annuity fund, an amount ofthe initial mortality death benefit and a date for converting from anannuity phase to an insurance phase, entering the plurality of planparameters into a processor includes a data base, storing the pluralityof plan parameters in the processor and selectively calculating thevalue of the annuity fund and death benefit during the annuity phase andselectively calculating the value of the death benefit during theinsurance phase.
 11. The system for converting an annuity fund to a lifeinsurance policy of claim 10 further including selectively displayingthe calculated values.
 12. The system for converting an annuity fund toa life insurance policy of claim 10 further including selectivelyprinting the calculated values.
 13. The system for converting an annuityfund to a life insurance policy of claim 10 further includes enteringthe plurality of plan parameters, the cost of the guaranteedinsurability option and a periodic plan management fee into the database.
 14. The system for converting an annuity fund to a life insurancepolicy of claim 13 wherein the data base includes the plurality of planparameters, incremental investment income, cost of the guaranteedinsurability option and periodic management fee, and the processorincludes calculating means to selectively calculate the beginning ofyear fund value, net amount at risk, cost of insurance, investmentincome, end of year fund value, corridor percentage and total deathbenefit.
 15. The system for converting an annuity fund to a lifeinsurance policy of claim 14 further including inputing the investmentincome into the processor and calculating the plan values comprisesderiving the beginning of year fund value as the previous end of yearfund value less the periodic plan management fee, the net amount at riskduring the annuity phase as the difference between the total deathbenefit at the date of conversion and the end of year fund value at dateof conversion; the net amount at risk during the insurance phase as thedifference between the year end total death benefit and the previousyear end fund value; the cost of insurance during the annuity phase asdetermined by the amount of selected initial death benefit, issue age ofperson and conversion age of person; the cost of insurance during theinsurance phase as determined by actuarial rates in the database; theend of year fund value as the beginning of year fund value less the costof insurance increased by the investment income; the total death benefitduring the annuity phase as determined by the actual value of the fundat the time of death and the total death benefit during the insurancephase as equal to the corridor percentage of the beginning of year fundvalue or the selected initial death benefit which ever is greater. 16.The system for converting an annuity fund to a life insurance policy ofclaim 15 wherein the values can be calculated for any particular periodor over the span of the fund plan by the processor.
 17. The system forconverting an annuity fund to a life insurance policy of claim 15further comprises displaying values of the plan.
 18. The system forconverting an annuity fund to a life insurance policy of claim 17further comprises printing the values of the plan.
 19. The system forconverting an annuity fund to a life insurance policy of claim 18further comprises transmitting the values to an external terminal.
 20. Amethod to establish and administer a plan convertible for an annuity toa life insurance policy at a predetermined conversion date upon theselection of a plurality of plan parameters.
 21. The method of claim 20comprising the following steps: establishing an annuity fund includingselecting an initial predetermined value and purchasing an annuity forthe initial predetermined value, establishing an irrevocable lifeinsurance conversion plan including selecting the predeterminedconversion date, selecting a predetermined mortality death benefit atthe predetermined conversion date and purchasing a guaranteedinsurability option to guarantee the availability of the predeterminedmortality death benefit at the predetermined conversion date, accruinginvestment income within the annuity fund on a tax deferred basis untilthe predetermined conversion date, converting the annuity fund to thelife insurance policy with the predetermined mortality death benefit atthe predetermined conversion date, accruing income within the lifeinsurance policy until the death of the owner of the life insurancepolicy and disbursing the death benefit to the beneficiary at the deathof the owner of the life insurance policy.